M3: Liabilities (IAS 37 Provisions, Contingent Liabilities & Assets) Flashcards
(12 cards)
What is a provisions and Contingent liabilities?
Provisions are liabilities with an element of uncertainty.
Contingent liabilities are liabilities with an
even higher degree of uncertainty.
What happens if there is just a possibility rather than probable outflow of economic resources?
We do not do a provision. only when its probable.
What is the key 4 criteria for a provision?
1) Is there a present obligation that is legal or constructive?
2) Is it from a past event, which is independent of future actions?
3) Is the outflow certain, probable, possible or unlikely? Probable is defined as “more likely than
not”.
4) Can you measure the outflow? A reasonable estimate is acceptable.
What is a legal/constructive event mean as part of the main criteria for a provision?
Legal - Contractural or results from a legal process
Constructive - Entity creates a valid expectation that it will accept responsibilities through: Established pattern of past practice, Issuing a statement, Published policy.
What do we do if a situation is:
- Probable
- Possible
- Unlikely
Probable - Recognise within accounts
Possible - Disclose
Unlikely - Do nothing
In order to recognise restructuring provision, what two things must be met?
- Detailed formal plan for restructuring
- Company starting to implement/announce main features of this plan
How do we account for: Future operating losses, Onerous contracts
and Restructuring
Future operating losses - We cannot account for operating losses under a provision. This should be dealt with under asset impairment IAS 36.
Onerous Contracts - Recognise at the lower amount of the net costs to fulfil the contract OR net cost to cancel
Restructuring - If there has been detailed formal plan AND started to be implemented/announced then we recognise this provision. If not, we do not recognise.
How do we discount a provision on initial recognition and subsequent measurement?
Initial: Total cost / (1+Discount Rate)^Total years
Subsequent: We recognise the finance cost each year after initial recognition.
What are the two main techniques to value a provision?
1) Best estimate aka most likely outcome (Independent expert advice and events after the reporting period)
2) Expected value technique (Weighted by their probability. e.g. 20% return rate = 0.2*rev)
What do we do if there is an increase/decrease in the initial amount used to create a provision?
e.g. 25m initial. Increased to expected 30m/20m?
Increase: We post the finance cost on the prior amount but then we adjust the total value by doing 30m/ (1+Discount Rate)^Years Remaining
Decrease: We do 20m / (1+Discount Rate)^Years Remaining
What is an onerous contract?
An onerous contract is a contract in which the unavoidable costs of fulfilling the contract exceed the
economic benefits derived from carrying it out.
If a contract is profitable when fulfilled, what does this mean for determine if it’s an onerous contract?
It CANNOT be onerous.
To be onerous, it must be loss-making as we are looking at the net COST to fulfil..
